The three business credit reporting companies are Dun & Bradstreet, Equifax and Experian. Each has its own way of gathering data and scoring your business, but they all look for information from investors, lenders, banks, and credit card issuers. Once you apply and get approved for a business credit card, you start building up a credit history.
You can view a sample credit report for a fictitious medical center on Experian’s website.
There are a number of ways to improve your business credit score:
1. Make sure to pay your bills on time.
This may seem obvious but there are entrepreneurs who think that paying bills as late as possible keeps their cash flowing. There are several reasons why this is often a bad strategy to follow, but one of the most important is that it affects your reputation and your relationships with your business partners. During tough times like these, when capital is scarce, you will seem like a much higher risk than a business that pays bills on time.
2. Be careful whom you authorize to use your company’s credit card.
Having authorized users that you absolutely trust is key in maintaining a good credit score. While it’s easy to delegate certain business purchases to your managers or even lower level employees, make sure you always check how that information is handled and disseminated. A manager may get too busy to place that Office Depot order and delegate the task to their assistant. She or he may not necessarily have nefarious intentions, but anyone could leave the information in plain sight for someone to steal.
3. The number of trade experiences is a driving force behind achieving a good business credit score.
Trade credits are loans extended in B2B agreements between a supplier and a business, based on a buy-now-pay-later arrangement. This credit extended to a company (borrower) becomes a tradeline once it’s reported to a credit reporting agency. The more tradelines you have and the more you comply with the underlying financial obligations, the better your company will look. It usually takes between 12 to 15 months to see an increase in the company’s credit score, provided all of the company’s bills have been paid on time during that period.
4. Don’t apply for too many credit cards within any given 6-month period.
Credit card issuers have to perform a credit check every time you apply for credit, which has a negative impact on your score. In addition, your account doesn’t get a chance to age.
5. Monitor your outstanding balances.
Any business can have a bad week or month, or quarter. The best way to go about it, especially when you are expecting a decrease in your AR quite soon, is to talk to whomever you owe money and explain the situation. Make sure you find someone with authority who can update your payment schedule accordingly or negotiate some sort of arrangement for the near future.
6. Don’t buy someone else’s company hoping to acquire their tradelines.
Buying tradelines is not actually illegal, but it may not have the consequences a business owner expects. Some credit repair companies sell the so-called ‘shelf corporations’ which already have an aged credit history. Your company buys this paper corporation and the corporate credit records that go along with it. The way this can backfire is that lenders, in general, frown upon this practice. They may choose to not extend credit if they discover that you use someone else’s pre-existing credit history. Even some of your business partners may see this as circumventing the system and exhibiting a deceitful, if not illegal, behavior. It can then become a huge legal problem when you unknowingly use the corporation’s paperwork, incorporation papers, tax returns, etc., to obtain new credit, if those documents are fakes that were sold along with the corporation.
7. Monitor your credit utilization.
The temptation to pay off all of your business loans and have zero debt is real, particularly when you have a windfall profit. While it’s advisable to pay down large debts, it doesn’t make a lot of sense to lower your utilization to the point where you have no activity. Maximizing your lines of credit is also a bad idea. The rule of thumb is to maintain the utilization ratio of your loans at 30%-40% which translates into owing only 30% to 40% relative to your credit limit.
8. Maintain old accounts.
Current credit scoring models look not just at how much credit you use but also how long you use it for. Even if you pay off a loan or a business credit card, keep it there. The longest you keep a credit card or a line of credit open, the more aged your credit record becomes.
9. Don’t ignore liens and judgments against your company.
These are factored into the calculation of your credit risk and ultimately credit score. A judgment tells a potential investor that not only your business can’t fulfill its obligations but it took no steps to prevent the deterioration of the business relationship. The best thing to do when you’re served with a lawsuit is to respond and try to settle outside of court.
10. Encourage your vendors and creditors to report your positive payment history.
Not all businesses notify the credit reporting agencies of their transactions, but you should make a consistent effort to remind them of the mutual benefit this can have. Keep in mind that the three business credit agencies need up to 3-4 tradelines to create a credit file for your business.
11. Take immediate action if you suspect someone has tampered with your business data.
In spite of increased security requirements and the development of data protection software, business identity theft is becoming more prevalent. A person hacking into your company’s server can gain access to more than just personal data. Important business records, such as your tax identification number (TIN) or banking information, can be used to open new lines of credit or credit cards, and even get cash or merchandise.
12. Don’t unnecessarily spread news about your company’s problems.
In addition to overdramatizing your situation, this may garner some sympathy, but it might also make creditors wary. They could become reluctant to associate themselves with you and your company, withholding support when you need help to shore up your business down the road. If they don’t want to do business with you, it’s going to be difficult to get that first positive trade reference to the three agencies or additional trade references down the road.
Depending on where you are in the lifecycle of your company and your strategic business model, you may not care much about your business credit score in the beginning. But future investors or your bank will care, if you ever need a loan. To find out where you stand, you may obtain a credit report, for a fee, from any of the three business credit reporting bureaus. Contrary to the strict privacy that accompanies personal credit reports, your business’ report is publicly available to anyone willing to pay for it. It’s up to you what you want it to look like.